Venture deals fell 52%

Decline in Md. reflects lack of big target firms

Freewebs is No. 1

October 24, 2006|By Tricia Bishop | Tricia Bishop,Sun reporter

With bangs in his eyes, the requisite goatee and an ill-fitting suit - still awkwardly hip - Haroon Mokhtarzada seemed a decade out of place, looking more like a dot-commer than a Harvard Law School graduate with an economics degree and a baby on the way.

He paced before the audience of venture investors at the spring conference, waiting to make his first formal pitch for cash.

With any luck, it would help net $5 million for his Silver Spring Internet publishing business, Freewebs Inc. Mokhtarzada checked a last detail or two, sent someone to find a wireless microphone and, when his turn came, took the stage.

"Can you guys hear me?"

Data released this morning show that he was heard and then some, with his company taking in $11 million this summer, twice what Mokhtarzada had hoped for.

It was the biggest third-quarter, venture-capital deal in Maryland according to today's MoneyTree Report, which chronicles such spending in the United States and select foreign countries.

Nationwide, venture investment for the three-month period that ended Sept. 30 remained steady, topping $6 billion for the third consecutive quarter, with biotechnology edging out software as the most-funded industry for the first time.

Biotechs across the country brought in about $1.14 billion, compared with software's $1.09 billion, said the report, produced by National Venture Capital Association and PricewaterhouseCoopers. The survey was based on data from Thomson Financial.

But in Maryland, where biotech is considered key, such deals lagged behind more traditional tech ventures like Mokhtarzada's.

Four biotechnology businesses raised a little less than $4 million in the quarter, compared with the $30 million raised by seven local software companies, whose products help with everything from database management to educational training.

Venture capital investment in the state overall appeared to be down.

From July through September, 26 companies received an average of $4.3 million in venture backing, a 52 percent drop from the average $8.8 million raked in by 25 companies in last year's third quarter. On the whole, investment fell from $221 million in the comparable quarter of 2005 to $111 million this year.

The culprit seems to be a lack of big-ticket deals of the kind Maryland experienced in the first and second quarters of the year, when wireless communications company Kajeet Inc. signed a $27 million deal and broadband-over-power-lines provider Current Communications Group raked in $130 million, respectively.

"It's interesting. There were a lot of early-stage deals in the state, and software did move ahead of biotech" this quarter, said William S. Corey Jr., managing partner of PricewaterhouseCoopers' Baltimore office. "I would be interested to see if that sustains itself. I would suspect that it may flip. All it takes is one large biotech deal."

During a conference call yesterday to discuss the findings, venture capitalists called this third quarter the best since 2001 and said the number of early-stage investments suggests that people have been able to put money into new projects, rather than continually feeding old enterprises, such as dot-coms first funded during the late 1990s.

"There has been a lot of activity centered on wrapping up those projects started before and during the bubble," said John S. Taylor, vice president of research at the National Venture Capital Association, based in Virginia.

That's starting to change, he said, with attention turning to first-time financings such as Freeweb's.

Mokhtarzada, a Maryland native in his 20s who graduated from Harvard last year, founded the company with a brother in 2001. He based it on $2,000 in seed money and a simple tenet: developing a Web site builder that was, Mokhtarzada says, "easy enough for my mother to use."

Five years, 15 employees and 10 million users later, the next step was looking for an influx of cash, which led Mokhtarzada to the Washington venture capital conference in May.

His reputation preceded him. Investors buzzed about the company, calling its team "bright, young and talented" and its audience "on par with some of the largest media partners on the Web."

"We're taking a look at them," divulged Scott M. Frederick, a general partner with Valhalla Partners LP in Vienna, Va.

He wasn't alone. Though it turned out Mokhtarzada didn't meet any venture capitalists there whose money he wanted to take, their interest helped him seal deals with Novak Biddle Venture Partners and Columbia Capital. Once they got word competitors were sniffing around, he said, they moved to close.

Mokhtarzada plans to use the $11 million to build the "greatest Web publishing system on the Internet." He has doubled his staff since that May conference, to about 32 people, won a Montgomery County small-business award and yesterday announced the opening of sales offices in New York.

"There are a lot of demands, especially when you're a company trying to reach out to a very broad audience," Mokhtarzada said to partly explain taking on two partners and accepting double the amount of venture investment he'd sought.